Environmental regulation and outward foreign direct investment: Evidence from China

This paper explores the impact of environmental regulation (ER) on outward foreign direct in-vestment (FDI) flows in China. During the period from 2013 to 2015, all Chinese cities were required to join a nationwide automatic air quality monitoring network in batches, and this policy exogenously raised local environmental regulation. This unique policy implemented full coverage through a staggered adoption, which motivates this paper to apply an event study approach to identify the treatment effect of stringent environmental regulation. Based on a city-year level capital outflows dataset constructed from the fDi Markets database, we obtain three main findings: (1) environmental regulation significantly stimulates outward FDI flows; (2) this promoting effect centers on polluting industries; and (3) these ER-induced FDI outflows are mainly directed toward countries with weaker environmental protection and with a closer geographic and cultural dis-tance to the home country. These results together provide a snapshot confirming the classical "pollution haven hypothesis".